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}\viewkind1\viewscale100\margl0\margr0\margt0\margb0\deftab80\dntblnsbdb\expshrtn\paperw12240\paperh15840\pard\sb0\sl-240{\bkmkstart Pg1}{\bkmkend Pg1}\par\pard\ql \li1440\sb0\sl-460\slmult0 \par\pard\ql\li1440\sb0\sl-460\slmult0 \par\pard\ql\li1440\ri1504\sb280\sl-460\slmult0 \up0 \expndtw0\charscalex97 \ul0\nosupersub\cf1\f2\fs40 Controversy Over Political Activities of Welfare \up0 \expndtw0\charscalex98 Organizations \par\pard\ql \li1440\sb272\sl-276\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf2\f3\fs24 The Legal Intelligencer \par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\sb8\sl-276\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf4\f5\fs24 June 26, 2012 \par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\ri1242\sb8\sl-276\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf3\f4\fs24 In the wake of the U.S. Supreme Court's landmark decision in \ul0\nosupersub\cf2\f3\fs24 Citizens United v. Federal \line \up0 \expndtw-2\charscalex100 Election Commission\ul0\nosupersub\cf3\f4\fs24 , which permits corporations to spend unlimited funds on the \line \up0 \expndtw-2\charscalex100 production and distribution of political advertisements for (or against) candidates \line \up0 \expndtw-2\charscalex100 running for public office, the Internal Revenue Service has seen a dramatic rise in the \line \up0 \expndtw-2\charscalex100 formation of nonprofit organizations that engage in political activities. However, many of \line \up0 \expndtw-2\charscalex100 these newly formed nonprofit organizations are not electing to be tax-exempt under \line \up0 \expndtw-2\charscalex100 Section 527 of the Internal Revenue Code of 1986 as amended \u8212? the section \line \up0 \expndtw-2\charscalex100 specifically intended for political organizations. Instead, in an effort to keep the identity \line \up0 \expndtw-2\charscalex100 of donors anonymous, many groups are electing tax-exempt status under the social \line \up0 \expndtw-2\charscalex100 welfare organizations provision of Section 501(c)(4), which lacks the donor disclosure \line \up0 \expndtw-3\charscalex100 requirements of Section 527. \par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\sb8\sl-276\slmult0 \up0 \expndtw-2\charscalex100 Allegations have been made that the IRS is subjecting certain political nonprofit \par\pard\qj \li1440\ri1261\sb7\sl-273\slmult0 \up0 \expndtw-2\charscalex100 organizations, such as various Tea Party groups that have applied for tax-exempt status \up0 \expndtw-2\charscalex100 under the IRC's Section 501(c)(4) to heightened scrutiny due to their political campaign \up0 \expndtw-2\charscalex100 activities, despite the fact that other social welfare organizations have also historically \up0 \expndtw-3\charscalex100 engaged in such activities. \par\pard\ql \li1440\sb0\sl-275\slmult0 \par\pard\ql\li1440\ri1397\sb11\sl-275\slmult0 \up0 \expndtw-2\charscalex100 Under the IRC's Section 501(c)(4), nonprofit organizations operating exclusively for the \line \up0 \expndtw-2\charscalex100 promotion of social welfare are exempt from income taxation if the organization's \line \up0 \expndtw-2\charscalex100 earnings do not benefit any shareholder or individual and if no substantial part of its \line \up0 \expndtw-2\charscalex100 activities consists of providing commercial-type insurance. The Treasury regulations \line \up0 \expndtw-2\charscalex100 expand upon the meaning of "social welfare," stating an organization is considered to \line \up0 \expndtw-2\charscalex100 be operated exclusively for the promotion of social welfare so long as it is primarily \line \up0 \expndtw-2\charscalex100 engaged in promoting the common good and general welfare of the people of the \line \up0 \expndtw-2\charscalex100 community in some way. However, the Treasury regulations specifically exclude \line \up0 \expndtw-2\charscalex100 participation in political campaigns from being considered the promotion of social \line \up0 \expndtw-3\charscalex100 welfare. \par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\ri1403\sb9\sl-276\slmult0 \up0 \expndtw-2\charscalex100 Yet, social welfare organizations are not prohibited from engaging in political campaign \up0 \expndtw-2\charscalex100 activities. The IRS, in a 1981 Revenue Ruling, held that a social welfare organization \up0 \expndtw-2\charscalex100 may engage in lawful political campaign activities for (or against) certain candidates \up0 \expndtw-2\charscalex100 running for public office so long as such activities do not constitute the organization's \up0 \expndtw-2\charscalex100 "primary" activity. Unfortunately, neither the Treasury regulations nor the Revenue \line \up0 \expndtw-3\charscalex100 Ruling define what constitutes as "primary" activity. \par\pard\qj \li1440\sb0\sl-280\slmult0 \par\pard\qj\li1440\ri1371\sb1\sl-280\slmult0 \up0 \expndtw-2\charscalex100 Social welfare organizations initially caught the media's attention in spring 2011 when it \line \up0 \expndtw-2\charscalex100 was reported that the IRS was examining several donors for their failure to file and pay \par\pard\sect\sectd\fs24\paperw12240\paperh15840\pard\sb0\sl-240{\bkmkstart Pg2}{\bkmkend Pg2}\par\pard\qj \li1440\sb0\sl-275\slmult0 \par\pard\qj\li1440\sb0\sl-275\slmult0 \par\pard\qj\li1440\sb0\sl-275\slmult0 \par\pard\qj\li1440\sb0\sl-275\slmult0 \par\pard\qj\li1440\ri1278\sb113\sl-275\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf3\f4\fs24 gift tax for their contributions to certain social welfare organizations engaged in political \up0 \expndtw-2\charscalex100 campaign activities. Inquiries were made regarding whether the IRS's examination was \up0 \expndtw-2\charscalex100 politically motivated or simply part of an increased effort to enforce gift tax laws. A gift \line \up0 \expndtw-2\charscalex100 tax is generally imposed under the IRC's Section 2501(a) when money or other property \up0 \expndtw-3\charscalex100 is gratuitously transferred. \par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\sb9\sl-276\slmult0 \up0 \expndtw-2\charscalex100 The IRC provides an exclusion from gift tax for gifts made to qualifying political \par\pard\ql \li1440\ri1297\sb0\sl-277\slmult0 \up0 \expndtw-2\charscalex100 organizations and also a deduction for charitable gifts. However, there is no similar \line \up0 \expndtw-2\charscalex100 exclusion or deduction for gifts made to social welfare organizations. Thus, money or \line \up0 \expndtw-2\charscalex100 other property transferred by gift to a social welfare organization should, in theory, be \line \up0 \expndtw-2\charscalex100 subject to gift tax. Formal guidance is limited in this area because the IRS has \line \up0 \expndtw-2\charscalex100 historically not enforced this nuanced part of the law. After several media reports on this \line \up0 \expndtw-2\charscalex100 issue, the IRS, in July 2011, suspended its examinations and stated it no longer \line \up0 \expndtw-2\charscalex100 planned to enforce gift tax with respect to social welfare organizations, at least until \line \up0 \expndtw-2\charscalex100 Congress either takes action to require the IRS to charge the tax or until the IRS can \line \up0 \expndtw-2\charscalex100 spend more time studying the issue and explain its views to the public. \par\pard\ql \li1440\ri1457\sb269\sl-275\slmult0 \up0 \expndtw-2\charscalex100 The current controversy surrounding social welfare organizations heated up when \line \up0 \expndtw-2\charscalex100 certain Tea Party groups publicly complained that their applications for Section \line \up0 \expndtw-2\charscalex100 501(c)(4) nonprofit status were being subject to heightened scrutiny by the IRS, \line \up0 \expndtw-2\charscalex100 resulting in significant delays in the approval process. For example, in January 2012, \line \up0 \expndtw-2\charscalex100 the IRS requested that the Richmond Tea Party, which applied to become a social \line \up0 \expndtw-2\charscalex100 welfare organization in December 2009, provide a full list of its donors and volunteers \line \up0 \expndtw-2\charscalex100 and inquired about whether the organization had engaged in lobbying or had business \line \up0 \expndtw-2\charscalex100 dealings with candidates for public office. These inquiries raised concerns that the IRS \line \up0 \expndtw-2\charscalex100 was exceeding its scope of the typical disclosures required under IRS Form 1024. \par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\ri1250\sb9\sl-276\slmult0 \up0 \expndtw-2\charscalex100 In response to these complaints, Charles W. Boustany Jr., chair of the Ways and Means \line \up0 \expndtw-2\charscalex100 Oversight Subcommittee, sent several letters to IRS Commissioner Douglas Shulman \line \up0 \expndtw-2\charscalex100 requesting information about the status of various IRS compliance efforts involving the \line \up0 \expndtw-2\charscalex100 tax-exempt sector and the IRS's oversight of the applications for tax exemption \line \up0 \expndtw-2\charscalex100 specifically related to any Tea Party group. Unsatisfied with the response he received \line \up0 \expndtw-2\charscalex100 from the IRS, Boustany recently set up a series of congressional hearings to explore the \line \up0 \expndtw-2\charscalex100 IRS's activities in investigating political groups seeking tax-exempt status. \par\pard\ql \li1440\ri1296\sb264\sl-276\slmult0 \up0 \expndtw-2\charscalex100 In addition, 12 Republican senators wrote to Shulman expressing their concern over the \up0 \expndtw-2\charscalex100 IRS's inquiries received by certain organizations applying for tax-exempt status that \up0 \expndtw-2\charscalex100 were perceived to be excessive. The senators urged the IRS to pursue federal tax \line \up0 \expndtw-2\charscalex100 compliance efforts without regard to politics of any kind and requested assurance that \up0 \expndtw-2\charscalex100 the recent inquiries had a sound basis in law and were consistent with the IRS's \line \up0 \expndtw-3\charscalex100 treatment of tax-exempt organizations across the spectrum. \par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\sb8\sl-276\slmult0 \up0 \expndtw-2\charscalex100 In the interim, seven Democratic senators, including Senate Finance Committee \par\pard\qj \li1440\ri1682\sb1\sl-280\slmult0 \up0 \expndtw-2\charscalex100 member Charles E. Schumer, called on the IRS to investigate whether certain social \line \up0 \expndtw-2\charscalex100 welfare organizations enjoying tax-exempt status under the IRC's Section 501(c)(4) \line \up0 \expndtw-2\charscalex100 were improperly engaged in political campaign activities. In a letter to Shulman, the \par\pard\sect\sectd\fs24\paperw12240\paperh15840\pard\sb0\sl-240{\bkmkstart Pg3}{\bkmkend Pg3}\par\pard\ql \li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\sb0\sl-276\slmult0 \par\pard\ql\li1440\ri1441\sb108\sl-276\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf3\f4\fs24 senators indicated concern that certain social welfare organizations were abusing their \up0 \expndtw-2\charscalex100 special tax status by engaging in substantial or even a predominant amount of \line \up0 \expndtw-2\charscalex100 campaign activity. In reviewing the IRC's Section 501(c)(4), the related Treasury \line \up0 \expndtw-2\charscalex100 regulations and certain federal court cases, they concluded that the Treasury \line \up0 \expndtw-2\charscalex100 regulations issued for the IRC's Section 501(c)(4) were more permissive than the \line \up0 \expndtw-3\charscalex100 language of the statute as interpreted by the federal courts. \par\pard\ql \li1440\sb264\sl-276\slmult0 \up0 \expndtw-2\charscalex100 In a subsequent letter, the same Democratic senators urged the IRS to impose a \par\pard\ql \li1440\ri1281\sb4\sl-276\slmult0 \up0 \expndtw-2\charscalex100 reporting requirement on social welfare organizations with political activities as well as a \up0 \expndtw-2\charscalex100 strict, percentage-based cap on the total amount of money a social welfare organization \up0 \expndtw-2\charscalex100 may spend on political activities. Some have proposed that this cap be set at 49 percent \up0 \expndtw-2\charscalex100 to ensure that political activities never account for more than half of an organization's \up0 \expndtw-2\charscalex100 total spending. However, the senators advocate that this percentage would allow for \up0 \expndtw-3\charscalex100 more political activity than should be permitted under the law. \par\pard\qj \li1440\sb0\sl-276\slmult0 \par\pard\qj\li1440\ri1294\sb8\sl-276\slmult0 \up0 \expndtw-2\charscalex100 In light of the recent congressional hearings, it is unclear whether Congress will develop \line \up0 \expndtw-2\charscalex100 more concrete standards for nonprofit social welfare organizations engaged in political \line \up0 \expndtw-2\charscalex100 activities. It is more likely that in the aftermath of this controversy, the IRS, through its \line \up0 \expndtw-2\charscalex100 revision of the Treasury regulations, will provide more guidance as to the definition of \line \up0 \expndtw-2\charscalex100 "primary" activity. With the high court's decision in \ul0\nosupersub\cf2\f3\fs24 Citizens United \ul0\nosupersub\cf3\f4\fs24 prompting a rise in \line \up0 \expndtw-2\charscalex100 the formation of "social welfare" organizations, it is imperative that either Congress or \line \up0 \expndtw-2\charscalex100 the IRS step up and clarify the extent to which a social welfare organization may \par\pard\qj \li1440\ri1255\sb18\sl-260\slmult0 \up0 \expndtw-2\charscalex100 engage in political activities. If not, every election year will devolve to similar controversy \up0 \expndtw-2\charscalex100 that will only damage the IRS's reputation for consistent enforcement of the law. \par\pard\qj \li1440\sb0\sl-280\slmult0 \par\pard\qj\li1440\ri1523\sb4\sl-280\slmult0 \up0 \expndtw-2\charscalex100 Reprinted with permission from the June 26 issue of The Legal Intelligencer. (c) 2012 \up0 \expndtw-3\charscalex100 ALM Media Properties, LLC. Further duplication without permission is prohibited. All \up0 \expndtw-4\charscalex100 rights reserved. \par\pard\sect\sectd\fs24}